(Bloomberg) -- President-elect Donald Trump has yet to announce his pick for Treasury secretary, but Kevin Warsh — a former Federal Reserve board member well known to Wall Street — has at least won some backing in the bond market.
That’s how some strategists are reading the tea leaves from a rally in Treasuries Monday, following news that Warsh is a new candidate to take the Treasury’s helm next year. The reporting “may have been a big factor” in the rally that began Monday, Deutsche Bank AG’s Jim Reid told clients in a note. Commerzbank AG’s Christoph Rieger similarly attributed the recovery to hopes Warsh gets the job.
While the president-elect quickly announced foreign and security policy posts, the Treasury search has slowed amid infighting over the decision. Along with Warsh, Trump’s list of potential candidates for the job include money managers Scott Bessent and Marc Rowan, along with Tennessee Senator Bill Hagerty, people familiar with the matter have told Bloomberg.
If nominated by Trump and confirmed by the Senate, one of Warsh’s top roles would be overseeing the $28 trillion in US government debt. Unlike some of the incoming president’s more unorthodox cabinet picks, with Warsh investors would get a well-known entity.
“With hope that Warsh gets the nod, there is less worry about how the Fed and Treasury work together to help fund the government,” Bob Savage, head of markets strategy and insights at BNY, reasoned.
Warsh, 54, served for half a decade at the Fed board after working as an economic adviser in the George W. Bush administration and as an investment banker at Morgan Stanley. He has spoken extensively on economics and markets since leaving public service, developing a reputation as a hawk on inflation. A Stanford University alumnus, he is a lecturer at Stanford’s Graduate School of Business and visiting fellow at the Hoover Institution, along with holding a number of advisory roles.
Warsh did not respond to a request for comment.
While Trump in recent months has advocated for the president having a say on interest rates, Warsh in a Bloomberg TV appearance in 2019 emphasized the importance of Fed independence. The US central bank “needs to ensure that it is vigilant about its independence,” he said at the time.
Bernanke Lieutenant
While Warsh arrived at the Fed board in 2006 as the youngest-ever governor, he shed the lightweight label given to him by critics, and became a lieutenant of then-Fed Chair Ben Bernanke during the global financial crisis. He served as a link at the board with securities firms, drawing on his investment banking experience. He was also an architect of the terms the Treasury dictated to nine of the biggest U.S. banks at the time in return for a $125 billion injection of government funds.
In his first term, Trump considered Warsh for replacing Janet Yellen as Fed chair, before opting for Jerome Powell instead. Warsh had also been in the running at one point for New York Fed president when he was a governor.
Trump Appears to Lament Passing Over Warsh for Powell at Fed
“Kevin Warsh is not an economist, but he got a lot of experience dealing with how the economy works and how it interacts with policy when he was at the Fed during the Great Financial Crisis,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “His major skill is dealing with people, he’s very good at getting along.”
Warsh’s Republican pedigree and connections may be seen as a plus by Trump and his close allies. Warsh married into the Lauder family, known for the eponymous Estée Lauder cosmetics empire.
Trade Views
But some of the views Warsh has expressed over the years – particularly on trade – may be tested when he’s called to be one of the key executors of Trump’s economic vision.
The president-elect has vowed to impose massive new tariffs on all foreign goods and even higher levies on those coming from China. Warsh has been less vocal on trade in recent years, but his earlier comments point to a strong dislike of protectionism and a support of free and open trade, which he saw as key for economic growth.
“The creep of trade protectionism is anathema to pro-growth policies,” he said in a speech he gave as Fed governor in 2010. US companies need access to foreign lands to grow exports and are made better by global competition, he added.
In a 2011 op-ed, he and former Florida Governor Jeb Bush said achieving strong growth requires the free flow of capital, goods and ideas. “We must find our voice to resist the rising tide of economic protectionism and recognize the job-creating benefits of our pending free trade agreements with South Korea, Colombia and Panama,” they wrote.
Right Match?
While the Treasury chief doesn’t have a specific role relating to trade, the secretary does weigh in on broader economic-policy discussions. In Trump’s first term, his then-Treasury Secretary Steven Mnuchin was viewed as counselling against the harshest protectionist actions against China.
Neil Dutta, head of US economic research at Renaissance Macro Research, hypothesized that Warsh might set aside his once-held trade views in part to keep alive the potential to move on to chair the Fed when Powell’s current term is up in 2026.
Dutta also questioned, in a note to clients Monday, whether Warsh would mesh well with Trump given his record of hawkishness. Before he left the Fed in 2011, Warsh had been a forceful advocate of ending quantitative easing — large-scale asset-purchases that the central bank only ended years later.
“Warsh is hawkish when the economy is strong and hawkish when the economy is weak. Is that really the type of individual Trump wants in his orbit?” Dutta questioned.
Trump is known for valuing market reactions, having touted the performance of equities during his first term. Bessent, a veteran hedge fund manager, would see a positive reaction, Dutta said. “He’s strong across a number of dimensions: knowledge of markets, macro, and will help execute Trump’s agenda without being the story himself.”
Warsh’s opinions on public finances, meanwhile, mean he may be a voice of caution in the incoming administration’s plans to extend a series of tax cuts.
“Outspending the nation’s capacity is dangerous,” he wrote in an op-ed earlier this year. “Absent a fiscal anchor, the list of buyers retreating from America’s debt markets won’t be limited to those who wish us trouble.”
--With assistance from Saleha Mohsin and Joshua Green.
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